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TMI Blog2016 (6) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's appeal in ITA No. 1262/Mum/2011 for A.Y. 2007-08 "1. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 10,00,000/- by way of disallowance u/s. 14A of the Income-tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals) failed to appreciate that the disallowance is arbitrary and illegal. 3. The learned Commissioner of Income Tax (Appeals) failed to appreciate that the disallowance is excessive and unreasonable. 4. The appellant craves leave to add, amend, alter and/or delete any of the grounds of appeal." 2.2 Revenue's appeal in ITA No. 6629/Mum/2012 for A.Y. 2009-10 "1.(a) Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the disallowances of foreign exchange loss claimed by the assessee. (b) Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in holding that the foreign exchange loss suffered by the assessee was not speculation loss but business expenditure. 2. Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the additions made by the AO u/s 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case, provisions of Income Tax Act 1961 and rules made there under and disregarded that such disallowance can only be made on the average investments yielding tax free income and not on total average investments." 3. Disallowance under section 14A r.w Rule 8D 3.1 Grounds in respect of the disallowance under section 14A of the Act r.w. Rule 8D have been raised by both Revenue and the assessee as under:- i) Assessee's grounds at S.Nos. 1to 4 for A.Y. 2007-08 ii) Assessee's CO No. (a) for A.Y. 20090-10 iii) Revenue's ground at S.No. 1 for A.Y. 2010-11 iv) Assessee's CO for A.Y. 2010-11 3.2.1 In A.Y. 2007-08 the assessee earned exempt dividend income of Rs. 46,655/- on which it was claimed that no expenditure was incurred. The Assessing Officer (AO) invoked the provisions of section 14A r.w. Rule 8D and proceeded to disallow an amount of Rs. 15,38,089/- thereunder. On appeal, the learned CIT(A) restricted the disallowance thereunder to Rs. 10,00,000/- on an adhoc basis. 3.2.2 The assessee is in appeal before us on this issue challenging the decision of the learned CIT(A) in sustaining the disallowance to the extent of Rs. 10,00,000/- as being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments for A.Y. 2010-11. 3.3.2 Before us, Revenue for A.Y. 2009-10 and the assessee by way of COs for A.Y. 2009-10 and 2010-11 have assailed the orders of the learned CIT(A) in respect of his finding/decision on the issue of disallowance under section 14A r.w. Rule 8D. Revenue in A.Y. 2009-10 assails the orders of the learned CIT(A) in restricting the disallowance to ½% of the average investment for administrative expenses. On the other hand, the assessee in its COs for assessment years 2009-10 and 2010-11 has challenged the impugned orders of the learned CIT(A) in directing the AO to compute the disallowance under section 14A r.w. Rule 8D @0.5% of the total average investment for administrative expenses without assigning any reasons, when such disallowance ought to be made only in respect of 0.5% of average investments yielding tax free income. 3.3.3 We have heard both the learned D.R. for Revenue and the learned A.R. for the assessee. In the course of hearing, the learned A.R. for the assessee submitted that the assessee had earned exempt dividend income of Rs. 41,216/- in A.Y. 2009-10 and Rs. 40,003/- in A.Y. 2010-11 and that while the assessee had claimed that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the Tribunal remitted the matter to the Assessing Officer with a direction to decide the same afresh in accordance with law after affording due and reasonable opportunity of being heard to the assessee. The relevant finding recorded by the Tribunal reads thus:- "7. In the instant case, the income from dividend has been shown at Rs. 1,11,564/-, the disallowance under section 14A read with Rule 8 D worked out by the Assessing Officer comes to Rs. 4,09,675/-. Thus, it is clear that the AO has disallowed the entire tax exempt income which is not permissible in view of the judgment of the Hon'ble Delhi High Court referred to above. The Hon'ble Delhi High Court held that the window for disallowance is indicated in section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". The disallowance under section 14A read with Rule 8D as worked out by the Assessing officer is not in accordance with law and as such working is not sustainable. 8. In view of the above observations, I think it is appropriate to set aside the order of the learned CIT(A) on this issue and remit the matter to the file of AO with a dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 123/Mum/2009 dated 28.09.2009. It was also contended that the issue is presently settled by the Hon'ble Apex Court's decision in the case of CIT, Bangalore vs. United Glass Mfg. Co. Ltd. in Civil Appeal Nos. 6447 to 6449 of 2012 dated 12.09.2012 wherein it was held that club membership fee paid by the company is an admissible business expenditure. 4.2 Having heard the rival submissions, we find that the issue of allowability of payment of club membership fee by the company on behalf of its employee as a business expenditure has been settled in favour of the assessee by the decision of the Hon'ble Apex Court in the case of CIT, Bangalore vs. United Glass Mfg. Co. Ltd. in Civil Appeals 6447 to 6449 of 2012 (supra). Respectfully following this decision of the Hon'ble Apex Court in United Glass Mfg. Co. Ltd. (supra) we hold that the expenditure of Rs. 1,00,000/- incurred by the assessee on club membership fees for employees is admissible business expenditure and therefore direct the AO to delete the disallowance of Rs. 1,00,000/- made in this respect. Consequently the CO's ground (b) for A.Y. 2009-10 is allowed. 5. Revenue's ground No. 1(a) & (b) for A.Y. 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of its raw material, i.e. fruit pulp were not speculative losses, but was allowable as business loss under section 37(1) of the Act. The learned A.R. contends that the learned CIT(A), on examination of the facts of the case, held that while hedging in the forward contracts, the assessee did not deal in foreign exchange but entered into these forward contracts with the object of safeguarding against foreign exchange losses on account of export sales proceeds to be received by it. Therefore it is clear that the AO's finding were based on factually incorrect assumption that the assessee was indulging in forward contracts in foreign exchange and not in the export material/products it dealt in. According to the learned A.R. for the assessee, the learned CIT(A) after examining the provisions of section 43(5) of the Act, held that the proviso (a) thereto was squarely applicable to the facts of the case on hand, as the assessee had entered into the foreign exchange forward contracts in the course of its business of manufacturing and exporting of its products against specific export orders, export sales and realization of such export sale proceeds, with a view to safe guard itself aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee not being dealer in foreign exchange, its forward contracts were only for foreign exchange which were settled without delivery thereof. The RBI has permitted importers and exporters to enter into foreign exchange forward contracts with the banks in respect of its export orders. In the case on hand the assessee entered into foreign exchange export contracts with banks to the extent of its export orders; which means every foreign exchange forward contract is against a specific export order. In this factual matrix, it is clear that the assessee did not deal in foreign exchange, but entered into foreign exchange forward contract with banks to safeguard itself against possible foreign exchange losses on account of export sale proceeds to be received. 5.3.3 We concur with the view of the learned CIT(A) in the impugned order that the facts and circumstances of the case establish that the proviso (a) to section 43(5) of the Act is squarely applicable in the case on hand since the foreign exchange forward contracts entered into by the assessee with banks, in the course of its manufacturing and export business of fruit pulp and allied items, were in order to safeguard itself aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs. 13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT v. Soorajmull Nagarmull (1981) 22 CTR Cal) 8: (1981) 129 ITR 169 (Cal)". 5.3.5 Taking into account the facts and circumstances of the case as discussed above and the judicial pronouncement referred to (supra), we are of the considered view that the orders of the learned CIT(A) for assessment years 2009-10 and 2010-11 holding that foreign exchange losses of Rs. 16,72,65,011/- and Rs. 6,53,06,057/- for assessment years 2009- 10 and 2010-11 respectively were business losses and directing the AO to allow the same calls for no interference from us and we therefore confirm an uphold the same. Consequently, Revenue's groun ..... 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